Monday, April 21, 2014

There’s more to a purchase than the price

We just experienced a winter that most of us thought would never end. Many of us kept looking at the calendar, wondering how in the world the Tigers would ever play their scheduled home opener in such wild, winter-like weather. Then suddenly, like magic, on the day of the opener, it actually felt like spring. And the Tigers pulled off a win with a walk-off hit.

Once again, evidence of spring is everywhere in southeast Michigan. Hammers are pounding at construction sites; orange barrels are lining the roads; and people are coming out of hibernation and into shops and restaurants and onto bike trails.

It’s good to see the activity and the optimism returning to our area. I believe it’s truly warranted, but in spite of the optimism, I want to share some words of caution.

Baseball has a designated hitter. In the investment arena, I have often shared with my clients that I’m their designated worrier. When things are going well with investments, as they have the last two years, I worry that the trend will soon end.

When we go through difficult investment periods and tough economic times, I worry about getting everyone through the turbulence.

In baseball, a designated hitter is successful if he gets on base three out of 10 at bats. But, as an investment adviser, if you’re only successful one-third of the time, you’d be seeking another career.

I recently stumbled across the 15th annual automotive study by A.T. Kearney. The study pointed out that over 41 percent of Americans are in need of non-prime financing options. That’s an increase of 15 million from the 2008-09 economic downturn.

What this means is that a large number of people shopping for a new car or new home are considered to be high-risk borrowers. Generally, this translates into a higher borrowing rate, which often leads to a higher payment or an extended payment period.

As you house hunt or shop for a new car, be sure to keep the math in mind, especially if you previously had some credit issues. For example, consider what might happen when you walk into a car dealership.

To keep the monthly payments low, the dealership might recommend that you take a 60-month loan instead of a 48-month loan. It might sound good at the time, but what happens three years into the loan when you owe more money on the car than it’s worth? Suddenly you’re upside down on the loan.

The same caution is in order when shopping for a home. Just think back to all the people that got into financial trouble when the rate on their adjustable rate home loan increased. Suddenly they were looking at an unaffordable house payment.

I’m not trying to be a spreader of doom and gloom. Rather, I just want to make sure my readers arm themselves with financial awareness. That means you have to look beyond the showroom price and calculate the entire cost of what you’re considering to buy. That includes taxes, borrowing costs and ancillary costs such as insurance.

It’s vital that you only purchase big-ticket items with the confidence you can survive a difficult economic cycle. Spring is finally here. Don’t let the bright sunshine blind your financial eyes.

No comments:

Post a Comment